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UNCLAS SECTION 01 OF 04 GUANGZHOU 005870 
 
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SENSITIVE 
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STATE ALSO PASS USTR 
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E.O. 12958: N/A 
TAGS: ECON ETRD EINV CH
SUBJECT:  Journey to the West -- Beihai:  Pearls, 
Fireworks, Sand, and Hope But Not a Whole Lot More 
 
REF: Guangzhou 5798 (and previous) 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY.  NOT FOR RELEASE OUTSIDE U.S. 
GOVERNMENT CHANNELS.  NOT FOR INTERNET PUBLICATION. 
 
¶1.  (SBU) Summary:  Acknowledging that previous economic 
development planning has not panned out as expected, 
Guangxi's Beihai City officials see their economic future 
in developing labor-intensive light manufacturing and 
logistic industries based on outside investment -- 
particularly from over-heated neighboring Guangdong -- and 
their infrastructure resources.  They also want to better 
use and protect their natural resources to attract more 
tourists especially to the 24 kilometer "Silver Beach" -- 
the "best beach in China" but replete with the shells of 
uncompleted hotels and housing units.  The city is 
competing, however, against ASEAN countries for export 
market and overseas tourists.  The City plans to develop a 
big deep-water port project, which they hope will become 
their economic growth engine but the port would also put 
Beihai into direct competition with other higher-powered 
coastal cities in South China.  End Summary. 
 
By the Sea, By the Beautiful Sea 
-------------------------------- 
¶2.  (U) The last stop in Guangxi in Consulate Guangzhou's 
"journey to the west" (reftel) was in beauteous Beihai 
where the Municipal Government's Vice Mayor, Commerce 
Bureau, Tourism Bureau, and a large local enterprise gave 
us a pretty good view of the economic development prospects 
for the city.  Beihai has a population of 1.4 million 
people.  Officials described Beihai as a small city with a 
weak industrial foundation and small GDP.  The City used to 
belong to Guangdong Province; in 1965 the Central 
Government put Beihai under the jurisdiction of Guangxi 
Zhuang Autonomous Region.  The local dialect of Beihai is a 
branch of Cantonese and retains strong cultural ties with 
Guangdong Province.  Most of the people in Beihai belong to 
the Han Nationality, and minorities are few, estimated at 
3,000 people.  Beihai has rich ocean resources including 
one of China's biggest fishing areas in the Gulf of Tonkin 
(Beibu Wan), a large number of salt-water pearl farms, and 
China's biggest mangrove forest. 
 
Slow Growth - High Potential 
---------------------------- 
¶3.  (U) Official said the City's future economic growth 
relies heavily on outside investment because most local 
enterprises are small and slow to expand, and the 
Government is not allowed to use its revenues to invest in 
any enterprise.  Beihai boasts -- somewhat dubiously -- 
that it is the only municipality in China that has a 
complete infrastructure combination of highway, railway, 
airport and deepwater port, a combination which should 
make it highly competitive.  The City Government has put 
the hopes of its economic future into one basket by 
developing a large port called "Tiecang" that city 
officials hope can help attract more investment to develop 
labor-intensive industries in Beihai. 
 
Missing the Boat: Bubbles, Corruption, and Incompetence 
--------------------------------------------- ---------- 
¶4. (SBU) In early 1990s, significant inflows of outside 
investment into the City's real estate industry created a 
big bubble which exploded in 1995, scaring off investors 
until today.  We saw many unfinished office and apartment 
buildings in the City and unfinished resort after resort 
along Beihai's beautiful, 24 kilometer long, Silver Beach 
during our visit.  News reports indicated that Beihai has 
missed landing several big industrial projects in recent 
years, including a big petroleum refinery project on which 
the local government spent three to four years negotiating 
with China's oil giant Sinopec but on which the city failed 
to get a green light from Beijing.  Beihai's neighbor 
Fangchenggang won the deal.  There also have been news 
reports of numerous complaints from local residents about 
the corrupt and incompetent government officials that 
failed to develop the local economy. 
 
GUANGZHOU 00005870  002 OF 004 
 
 
 
Trade Up but Pessimism about ASEAN 
---------------------------------- 
¶5.  (U) In 2005, Beihai's total export volume was USD 130 
million, and import volume reached USD 50 million.  The 
United States is Beihai's largest trading partner, 
accounting for about 27% of the City's foreign trade volume. 
In 2005, Beihai's export to the United States was USD 41.47 
million, and the main products include fireworks, 
aquaculture products, and textiles.  Beihai's total import 
from the United States was USD 9.96 million, mostly 
machinery. 
 
¶6.  (U) Though Guangxi and its major industrial cities such 
as Nanning and Liuzhou place great emphasis on the future 
growth of trade with ASEAN countries, Beihai officials did 
not look excited about their trade relations with their 
Southeast Asian neighbors because of similar export product 
structures.  The ASEAN area is only Beihai's fourth largest 
trading partner.  Beihai basically exports pesticide, 
fertilizer and leather to ASEAN countries, and imports raw 
materials, such as coal.  Its trade volume with ASEAN 
countries jumped by 50% in 2005, but officials explained 
that was because its trade volume in the past was so low. 
Beihai and ASEAN, especially Vietnam, are basically 
competitors exporting similar fruit and aquaculture 
products. 
 
Hoping to Get the Surplus Fat from Guangdong 
-------------------------------------------- 
¶7.  (U) Beihai is interested in attracting labor-intensive 
investment from its saturated neighbor of Guangdong or the 
Yangtze River Delta.  Beihai can provide incentives through 
a favorable tax policy, cheap land, abundant supply of 
power and labor to outside investors.  As a city located in 
China's Great Western Development Program, Beihai can 
provide both domestic and foreign investors income tax 
waiver treatment granted by the Central Government.  It can 
also use incentives as part of the Beibu Wan Development 
Area.  The cheapest land price in Beihai is as low as RMB 
25,000 (USD 2,941) per mu (1 mu = 0.17 acre).  The City 
also has a number of hydroelectricity stations and the unit 
price for industrial power consumption was only RMB 0.45 
(USD 0.05) per kilowatt-hour compared with Guangdong's 
price of over RMB 0.9 (USD 0.11).  Officials expressed 
their expectation that this combination of incentives would 
be sufficient to attract new investment.  Beihai has a 
large number of people working as migrants in Guangdong and 
officials hoped in the future the ideal choice for these 
migrant people would be to return home to get jobs at newly 
established enterprises. 
 
¶8.  (U) Beihai officials said in recent years the trend had 
been growing for industrial enterprises to transfer from 
Guangdong to Southern Guangxi.  Officials said the 
industrialization in Guangdong had developed to certain 
level and faced shortages of water, power and other 
resources.  As a result, Beihai has managed to attract 
several Shenzhen enterprises to build factories making 
purses, cell phone screens and MP4 players.  Though Beihai 
has a long tradition of making fireworks, officials said 
they were not receiving such enterprises transferring from 
Guangdong, nor would they approve the opening of new 
fireworks factory because they would like to move to higher 
value manufacturing.  During a visit to a large firework 
factory named "Qiangsheng," whose products are mainly for 
export to the United States and European countries, the 
management also told us that due to Beihai's interest in 
developing other industries, the company had recently taken 
over a firework factory in Hubei Province, rather than 
expanding in Beihai itsels, which would have made more 
sense in terms of logistics and supply management but which 
the Beihai government is reluctant to approve. 
 
Comparative Disadvantages 
------------------------- 
¶9.  (U) City officials disclosed Beihai's primary 
disadvantages in attracting investment are insufficient 
local shipping and the lack of an industrial infrastructure 
 
GUANGZHOU 00005870  003 OF 004 
 
 
to provide complementary sourcing for manufacturers. 
Beihai has only two container vessels going to Hong Kong 
each week and the trip takes over 30 hours compared with 
highway travel time of seven hours.  Some export-oriented 
enterprises have to use the more costly highway to ship 
their time-sensitive products to Hong Kong.  As Beihai has 
a poor industrial infrastructure, it is inconvenient for 
enterprises to find local component suppliers. 
 
Tourism Development 
-------------------- 
¶10.  (U) Beihai has China's longest sightseeing beach, 
Silver Beach, 24 kilometers long.  Its other tourist 
attractions include a UNESCO-rated mangrove forest, Weizhou 
Island with diving and European-imperialist era buildings, 
a big scenic lake, an 1920s-era street that the government 
is renovating, and a robust supply of seafood and pearls. 
The City has over 200 hotels with a total number of 27,000 
hotel beds.  Compared with Hainan Island, whose tourists 
are more high-end and generally can afford air tickets for 
their traveling, Beihai officials confessed that they 
basically receive low-end domestic tourists who drive to 
Beihai and seek the lowest-cost accommodations. 
 
¶11.  (U) In 2005, Beihai received 4.43 million domestic 
visits (including visitors who traveled there on multiple 
occasions), an 11 percent growth year-on-year.  A large 
number of the tourists are from neighboring Guangdong, and 
more and more of them are on driving tours.  The number of 
foreign visitors was only 30,000, and only one third of 
them were westerners with half of them coming for business 
and not sightseeing.  The remaining two-thirds of overseas 
visitors were from Hong Kong, Macao and Taiwan. 
 
¶12.  (U) Beihai also faces competition from its ASEAN 
neighbors who boast similar tourist resources.  Each year, 
about one million Chinese tourists take boats to travel to 
lower-cost Vietnam via Beihai, while the number of 
Vietnamese tourists visiting Beihai is very limited.  Since 
last July, ASEAN countries, particularly Vietnam and 
Guangxi (for China), started discussing the development of 
a "tourism circle" around Beibu Wan (Tonkin Gulf) to build 
synergy for the tourist market in the area.  City Tourism 
Bureau officials hope that by 2010, Beihai revenues from 
tourism will jump up from the current RMB two billion (USD 
248 million) to RMB six billion (USD 745 million), and the 
total number of annual visitors can grow to 10 million, 
with 100,000 from overseas spending USD 30 million.  The 
officials are paying more attention to the international 
market and have been actively seeking cooperation with 
European tourist wholesalers and in developing more 
backpacker accommodations. 
 
Big Projects 
------------ 
¶13.  (U) Besides attracting investment and developing 
tourism, Beihai plans to initiate the developing of 
logistics industry, especially a big project called 
"Tiecang" Port, in the 11th Five-Year Planning Period. 
Beihai officials hope the project can serve as the City's 
economic growth engine.  The City Government's main 
investment promotion target is Singapore, which, according 
to the officials, has close relations with Beihai and is 
always the first stop for Beihai's overseas investment 
promotion.  Some Singaporean companies have done research 
about investing into the project. 
 
¶14.  (SBU) Currently, Beihai has a port that mainly handles 
bulk cargo and recorded a volume of seven million tons in 
¶2005.  Its biggest berth can accommodate 50,000-ton boats. 
It was only in October 2005 that Beihai opened its first 
container route, which is connected to Hong Kong, with two 
trips each week.  The port has an annual handling capacity 
of 50 thousand containers, and handled 30 thousand twenty- 
foot equivalent units (TEUs) in 2005.  The City's bulk 
cargo can be directly shipped around the world, but for 
containers, Beihai is just a feeder port for Hong Kong, 
Shenzhen, or Guangzhou.  Surveys performed for the city 
show that Beihai has the potential to build 200 berths for 
 
GUANGZHOU 00005870  004 OF 004 
 
 
vessels at the 10,000-ton level, and the maximum level 
could be as high as 200,000-ton.  If Beihai could realize 
its ambitious dream, the ultimate capacity of its port 
would be comparable to Shanghai's, city officials claimed. 
Besides the port development project, two railways 
connecting Beihai with Guangdong and Guangxi's Yulin City 
will start construction this year.  The Government also 
plans to build a cross-ocean bridge to connect itself 
directly with Guangdong, though this project seems to be 
much less likely (not to mention grotesquely grandiose). 
Beihai hopes all these infrastructure projects will help 
develop the City's logistics industry and attract more 
industries to Beihai. 
 
Comment 
------- 
¶15.  (SBU) By putting their hopes primarily on developing 
deepwater port, Beihai will inevitably run into competition 
from their neighboring coastal cities with operating ports, 
such as Fangchenggang in Guangxi, or Zhanjiang in 
Guangdong.  All these ports will compete for the same bulk 
cargo resources from Southwest China.  It is doubtful that 
foreign investors would really put their money in Beihai 
for port development in the face of such competition. 
Similar resources and conditions, such as cheap labor and 
land, and a favorable deepwater line, will cause other 
coastal cities in Guangxi to adopt similar development 
strategies that will put them into competition for similar 
external resources, such as investment and cargo resources 
-- particularly since the regional government in Nanning is 
fairly passive in refereeing such competition, hence 
leading to a lot of wasteful utilization of economic 
planning resources for projects that will most likely not 
pan out. 
 
¶16.  (SBU) Guangdong supplies most of Beihai's tourists and 
probably much of its future enterprise capital and 
managerial talent.  But Silver Beach was bereft of any such 
tourists in the late afternoon hours when the Consulate 
party visited Silver Beach.  Scores of pearl sellers 
thronged around us, and we leveraged their hunger for sales 
to get some nice bargains.  Like these pearl hawkers, 
Beihai writ large is not in a strong economic bargaining 
position, and it too is likely to sell its prospects 
relatively cheaply to more advantaged visitors from 
Guangdong. 
 
¶17.  (U) The topic for our final city-specific message in 
our "journey to the west" series is actually during our 
drive homeward towards the east -- Maoming in Guangdong 
province, where the economic prospects and the 
professionalism of governmental officials even in this 
rather obscure part of Guangdong far outshone those in 
Guangxi. 
 
DONG